Tuesday, June 19, 2012

It would be the next Eurozone

The former Chancellor said it was “surreal” that the First Minister can claim the remainder of the UK would willingly share control over the pound and interest rates without checking first.

In reality, he said it was difficult to imagine English politicians managing to “sell” this to their constituents. Mr Darling concluded an independent Scotland would be more like “serfdom than freedom” if monetary policy was set by a different country.

The Treasury confirmed that Mr Salmond has had no discussions with the Bank of England about a “currency union” after separation and an independent Scotland would have no influence over sterling.

And why would this be such a bad idea? Because, of course, currency union without fiscal union is precisely what has the current disaster in the Eurozone so inevitable.

To do the same between the UK and an independent Scotland would be the purest folly.

The UK has a 2012 GDP of an estimated $1,557 billion: Scotland contributed a mere £139 billion (or about 8.9%), but then it has only about 9% of the population too.*

Having said that, however, Scotland has the potential to become as bad as the PIIGs: a few years ago, some 56% of people in the country derived their primary salary from the state (I don't know what the figure is right now).

* UK figure converted from nominal US dollars derived from Wikipedia (and corrected—I know GDP is not 2,500 trillion!), at current rate of $1 = 63.5p.

It is absurd to think of a bunch of central planners at Threadneedle street setting interest rates for an independent Scotland. But it's equally absurd that they set interest rates for all of England, or even all of London.

One size does not fit all.

The price of credit (interest rates) should be determined by the free market (just like all other prices).

"it contributes about 9.4% of UK taxes but receives some 9.3% of government spending."

But as you say, a large proportion of Scots derive their primary income from the state, and employees of the state don't really pay taxes, so those figures are likely to be quite misleading.

OTOH, London and surrounding areas probably derive the most benefit from being early recipients of new money (at the expense of people across the UK).

An independent Scotland would be foolish require that its citizens use GBP (or any other politically-controlled money).

I also think that whatever they decide to do about money, the people of an 'independent' Scotland would soon miss the teat of the British state, and would quickly turn to Brussels.

But if it weren't for the military implications, I'd be cheering them on.

My own preferred solution would be maximum devolution, with the UK handling national defence and border controls, and everything else delegated to Wales, Scotland, North Ireland, and England (or possibly even smaller units).

Currency unions can and do work. The Eastern Caribbean Union has been by any account a long-running and stable success - around since 1965. The CFA Franc zone in Africa has been around even longer - since 1945. Ireland kept sterling for 50 years after their independence, a rather more successful currency union for them than what they are stuck in just now.

The problem with the eurozone is twofold - they broke their own rules, and the constituent countries were too disparate in terms of productivity. Meanwhile, Scotland's rate of productivity is almost exactly the same as the rest of the UK's.

So there is nothing "insane" about the retention of sterling - it would be blindingly sensible for all parties, in the event of independence. The rest of the UK imports £40 billion worth of goods and services from Scotland every year, and Scotland likewise from them. A sterling zone maintains trade continuity, simple really.

But the real crux of the matter, which you've mysteriously sidestepped, is that North Sea oil, 80/90% or so of which falls in Scottish territorial waters, reduces the UK's already steep balance of payments by half. As in if the UK couldn't trade North Sea oil in sterling, its trade deficit would rocket up to double what it is now.

Without the significant asset of "oil-trading currency" status, the fundamental weaknesses of the British economy come home to roost in a way that will make present conditions look like a picnic. Sterling would become less credible every day.

Given all that, if they weren't so determined to make sure independence never happens, I believe the British political establishment would welcome a sterling zone rather heartily, and I struggle to see anything in it for them to deny Scotland a seat on the MPC. But I suppose we'll just have to wait and see - if there's one thing you can always count on the UK for, its ridiculous over-centralisation of power and the concurrently ridiculous refusal to relinquish any of it.